Tag: MERs

Into the Minutiae: Lowering your MERs While Meeting Your Goals.

You should be lowering your MERs, i.e. management expense ratios whenever it makes sense to do so. In short, the MER is the price that you pay for the investment product that you’re buying. It’s a percentage of your investment that is paid to the company that put the product on the market. MERs can range from as low as 0.04% to 2.75%.

As I’ve said before, success with money is within everyone’s grasp because the secret sauce isn’t being bright. Take it from me. I’m not the smartest lobster but I’ve managed to set myself up quite nicely by reading a little bit and following a few simple steps. I’ll share them with you right up front so you can start doing these things for yourself too. I promise that Future You will be very happy if you start and continue doing the following 3 things:

  1. Live below your means so that you always have money leftover to invest. Track your expenses. Cut down on the things that aren’t essential to your survival. Use that money to invest for the future and to build your emergency fund.
  2. Invest 20% of your net income for long-term growth in a well-diversified equity exchange-traded fund (ETF)***. You’ll find the 20% by completing step one. If you can’t find 20% right away, then start with whatever you can and work your way up to 20%.
  3. Re-invest all the dividends and capital gains that your portfolio generates. Do not spend this money! Your dividends and capital gains will bolster the money that you invest from your paycheque. They will exponentially increase the compound growth of your investments. The result of re-investing dividends and capital gains is having your portfolio growing bigger and faster without any extra work from you.

Consistently investing a portion of your paycheque every time you’re paid will vastly improve the odds that you won’t be homeless, hungry, and cold when you’re a senior citizen. If you follows these 3 steps faithfully, you’ll do very for yourself.

My favourite sibling and I were talking about investments and my sibling stated that I hadn’t optimized my investments over the years. I couldn’t disagree. The truth is that I have made mistakes over the years, and I could’ve made smarter choices sooner. However, I don’t flagellate myself too, too much over the choices I’ve made because no one is perfect. For all of the reading I’ve done and people I’ve talked to, here’s the truth. No one has an ideal investment track record. Every single person could’ve made atleast one better choice at some point. Everyone has made mistakes when it comes to their investment journey.

The only mistake that is fatal to building wealth is never starting. Working paycheque-to-paycheque for a lifetime is pretty much guaranteed to ensure that there is no retirement money waiting for you when employment ends.

Thankfully, that is one mistake that I didn’t make. I’ve been investing since the age of 21. Have I done it in the best way possible? Absolutely not! If I could go back and make different investment choices, you’d better believe that I would do so.

The one area where I didn’t screw myself too badly was in relation to MERs. As soon as I understood what they were, I made sure to lower them as quickly as I could.

Again, if you follow the first 3 steps that I’ve set out, Future You will be very happy.

Optimizing your MERs is simply delving into the minutiae.

Check out this expense ration impact calculator to see the difference that MERs make on your returns. Just for fun, plug in a starting investment of $0, an annual investment of $5200, expected return of 7%, and an investment duration of 30 years. Now, change the expense ratio from 0.04% to 2.75%. Carefully review the difference in the future value of total investment and the total cost of the fund.

Keep playing with this calculator, and use your own numbers. Maybe you’re not starting at $0, or you can’t invest $100/week, or the lowest MER you can find for the ETF you want is 0.35%. The point is that higher MERs mean that you keep less of your money over time. If you lower your MERs, then you will keep more of your money. Your time horizon is decades long and you’ll eventually have a 7-figure portfolio size.

Invest in ETFs with low MERs. When you pay lower MERs, more of your money will remain invested over a long period of time. Money that isn’t paid out as fees will benefit from compound growth. That means it stays in your pocket instead of going to the ETF-provider. Look for ETFs that have MERs of 0.5% or less and try to only buy those. You’ll be doing yourself a huge favour.

MERs shouldn’t be the first thing that you consider when you’re looking for the right ETFs to add to your portfolio. But if you want to optimize the returns on your investments, MERs shouldn’t be ignored either. If you have to choose between two ETFs that will allow you to meet your financial goals, pick the one that has the lower MER.

*** In the interests of transparency, I invest my money in VXC. This ETF is from Vanguard Canada. I like Vanguard because their ETFs have low MERs and they give me the diversification that I need to grow my portfolio over the long-term. I am not recommending that you invest in this ETF. I don’t know your circumstances and I’m not qualified to recommend financial investments to anyone. Do your own research and pick an ETF that will best help you meet your goals. If you do decide to get advice, go to a qualified financial advisor.

Learning from my mistakes & doing better

You need not make every mistake yourself. There’s always the option of learning from my mistakes, or others’ mistakes, and doing better. It’s one of the better aspects of being a sentient being who can learn from the world around them.

Back in 2008/2009, there was a recession. I got scared and I stopped contributing to my investment portfolio. This was a huge mistake! (And I’ve made many mistakes over the years when it come to my money.) There’s no way to go back in time and change my choices. So, this time around, it’s incumbent on me to not make the same mistake.

Though the experts haven’t yet called it such, I’m pretty sure that we’re in the very beginning of a recession. The stock market’s gains from 2021 have been wiped out. My investment portfolio has suffered a 6-figure loss! I’ve stopped checking its value because it’s too alarming to see the numbers continue to drop day-by-day.

When my portfolio suffered losses in 2008/2009, I made a big mistake. My error was to stop investing my money while the stock market was on sale. The stock market, as a whole, was falling in value. That means it was on sale! I should not have stopped contributing money from every paycheque. Instead, I should have stuck to my plan and continued to buy units in my selected mutual funds. (At the time, I had not yet switched over to cheaper-and-equally-effective option of buying exchange-traded funds.)

Do not make this mistake with your own investment portfolio. Continue to invest your money!

This time around, I’ve stuck to my plan. A portion of every paycheque is still being re-directed to my selected ETFs. Since the unit price of my ETFs is down, I’m buying more units with the same amount of money. And when the unit price goes back up, which it will, the value of my portfolio will benefit from having bought the additional units at a cheaper price.

If you haven’t started, now’s the time.

If you haven’t started investing in the stock market, now is a great time to do so. Everything is down, which means everything is on sale. Don’t ever believe that the stock market only goes up. Its nature is to go up and down. This is normal. Right now, it’s going down. It will go back up at some point, but you need not worry when.

In my inexpert opinion, money that you don’t need for a long time should be funnelled into the stock market. I used to believe that a person had to be completely debt-free before investing. My views have become more nuanced. If you’re in your 30s, 40s or 50s, and you haven’t yet started investing, I would not suggest focusing solely on your debts. Even if you can only squirrel away $50 each month for investing, do so. As you pay off your debts, you can use 75% of your former debt payment to increase the size of the initial $50 contribution.

Your $450/month payment is finally done? Great! Add $337.50 (= $450 x 75%) to your $50 so that you’re now contributing $387.50 per month to your investment portfolio.

Time in the market is necessary for your portfolio to grow. Starting to invest during a recession is a good thing for you. It means you’re buying when prices are low. The more you buy now, the better your upside when the stock market starts growing again.

Also, you’ll have to develop a thick skin to deal with the volatility of the market. Remember, stock market investing is a long-term play. This won’t be the last recession that you’ll have to endure. Starting in a recession today will make the less volatile times ever so much more pleasant. You’ll also be that much more experienced when the next recession rolls around.

Stick to ETFs to keep your MERs as low as possible.

Learning from my mistakes and doing better means you can avoid paying higher-than-absolutely-necessary MERs. I used to invest in mutual funds. Canada has some of the most expensive mutual funds in the world, which means that people who own mutual funds pay more in management expense ratios that people who own ETFs.

When Vanguard Canada became an option for me, I compared their ETFs to the mutual funds in my investment portfolio. The ETFs were comprised of the same companies that were in my mutual funds. In other words, I could still invest in the same companies for a much lower MER.

I used to pay 1%-1.5% in MERs on my mutual funds. When I only had an investment portfolio of $10,000, the MER shaved off $100-$150 every year. That’s not a horrible amount of money. However, I knew that I would be investing for another 20 years or so, and that I wanted my portfolio to grow much larger than $10,000. The question was whether I wanted the investment company to siphon away more of my money every year. After all, whatever monies weren’t eaten by the MER would stay invested in my portfolio and have the chance to grow over time.

Put yourself in my shoes. Would you rather pay $15,000 or $3500 for nearly-identical investment products? What makes the mutual fund worth an additional $11,000 per year?

Today, my portfolio is brushing up against the Double-Comma Club of $1,000,000. It makes no sense to pay $10,000-$15,000 in MERs each year when I can pay MERs of 0.35% or less.

Save yourself from another one of my mistakes, which was needlessly paying too much in MERs for my investment holding. Invest in ETFs instead of mutual funds. If you’re currently in mutual funds, find a comparable ETF and move your money to the ETF.

Stock-Picking is not for me!

My suggestion that you invest in the stock market while it’s down is NOT for those of you who want to buy individual stocks.

I don’t do stock picking. Personally, I find it takes too much of my time and it’s a very good way to lose money. I don’t have the expertise to understand any given industry, nor how any one company can guarantee dominance in its industry. The only individual stocks I own are the ones my parents bought for me when I was a baby. Again, I don’t do stock picking. I choose to only invest in ETFs because they have built-in diversification and I’m not committing my money to any one company. ETFs allow me to invest in a variety of industries and a much larger number of companies than I ever could otherwise.

To me, stock-picking requires a level of expertise and commitment that I simply don’t care to develop at this stage of my life. There’s always a chance that will change. If you want to do stock picking, then do your research first and make sure you know what you’re doing.

In a nutshell, don’t stop investing in the stock market just because we’re going into a recession. If one of your money mistakes is that you haven’t started to invest, then this is a great time to rectify that error. The stock market is down, which means investment products are on sale. You need to get your money into the stock market, and you need to leave it there to grow over a long period of time. Don’t procrastinate any longer – start today!

Getting Good Advice

When it comes to your money, you want to get good advice. The problem is that it’s very hard to know if you’re getting good advice, or whether you’re being scammed.

For my part, I’ve built my portfolio by myself and I started when I was a young adult. All told, it took me more than 25 years before I went to see a fee-only financial planner. He took my information – he crunched my numbers – he told me that I could retire 2 years earlier than I’d planned. His fee was worth every penny!

Bank Advisors

Reader of Long Association know that I’m not terribly fond of banks. I hate paying bank fees. For the most part, I think lines of credit are poisonous. Debt is not something I encourage people to have. If you take away debt & fees, banks have precious little to offer their clients. My impression of bank advisors is similarly dim.

Banks offer mutual funds to their clients. However, the bank’s offerings are generally more costly than what can be purchased elsewhere. Advisors from Bank A will sell you mutual funds with management expense ratios of 1%-2%. They will not tell you about nearly identical products that can be purchased for 0.35% or less, i.e. exchange traded funds (ETFs).

The advisors who work for banks are not bad people, necessarily. They’s simply employees. Part of their job is to sell their employers’ products to the bank’s customers. They are trained and are knowledgeable about financial products. However, the terms of their employment are such that they will never advise customers to check out the competition’s investment products. Advisors working for banks will never encourage customers – you – to go and see if the same product can be obtained for a lower price. This is just a simply fact. Advisors at Bank A receive their paycheques from Bank A, not from you. Since you’re not paying them, the advisors’ interests are more aligned with their employer’s than with yours.

I went to a Bank near the start of my investment journey. It was a less than great experience.

Was I getting good advice? No.

Did the bank charge me a high management expense ratio? Yes.

As I learned better, I did better. Time to move on.

Investment Companies

After my experience with buying mutual funds from the Bank in my early twenties, I decided to invest with one particular investment company. They had a slick marketing folder, an office in the mall near my job downtown, and I liked their website. What other criteria could I have possibly needed to choose an investment company?

I have no idea if that company is still around. What I do remember is that they charged atleast 1% for their mutual funds. The management expense ratios (MERs) were the same as, or a touch lower than, the Bank’s.

Was I getting good advice? No… but atleast more of my money was directed into my investments and not being paid out in MERs.

As time passed, I moved my money to a different investment company that had far lower MERs for their products. While this second company did not have an office in the mall, they did have a much better website and a wider array of products. (Throughout my whole investment journey, I never stopped reading about money and investing. As I learned more, I made better choices. Like they say – when you know better, you do better.)

I improved my portfolio mix by moving to the second investment company and I saved money on the MERs I was paying. Further, the second company was easily able to set up an automatic transfer from my chequing account to my investment account. Each time my paycheque landed in my bank account, the investment company would scoop out a portion of it to be added to my investment portfolio. This was a free service! Once I’d set it up, I never had to think about it again. I could go about my daily life knowing that my money was being investing for the Care and Feeding of Future Blue Lobster. All was well… for a time.

Bear in mind that I never stopped learning. I continued to read more books from the library and I delved into online articles about money & investing. That’s how I came to learn about ETFs and index funds, investment products that mirrored mutual funds for a much lower price. In other words, I could re-create the same portfolio by replacing expensive mutual funds with cheaper ETFs and pay even lower MERs. Eventually, I had to accept the fact that my second investment company’s MERs were too high when I could get the nearly-identical portfolio elsewhere for less money. Though I really enjoyed the convenience of my second investment company, that convenience wasn’t worth paying higher MERs. Whatever wasn’t diverted to paying MERs would instead be invested for long-term growth. I realized that I could improve my returns by investing my money into ETFs so that’s why I did.

Self-Directed Learning and Investing

At some point in my investment journey, I had opened a self-directed brokerage. When it was time, I moved my portfolio from my second investment company to my brokerage account. In a few simple keystrokes, I sold the mutual fund products and bought ETFs from BlackRock (aka: iShares). Unlike my last investment company, this one did not make withdrawals from my bank account. I had to set up my own automatic transfer so that I could buy units every month. And since I was using my brokerage account, I had to pay a commission.

Big deal! The money I was saving on my MERs was more than sufficient to cover the monthly commission fee. My twin goals were being met: consistently investing every month and saving money on my MERs.

What could be better?

Vanguard Canada was better. By the time Vanguard came to Canada, my self-directed investment education had already led me to its US counterpart. I was ready for their Canadian arrival. Now, I didn’t sell anything from my BlackRock holdings. For the most part, I’m a buy-and-hold investor. The exceptions I can remember were moving from the Bank to the investment company, between my investment companies, and then from my last investment company to my brokerage account.

Instead of selling investments, I simply re-directed future investment dollars to Vanguard’s products instead of BlackRock’s. Again, Vanguard’s offerings were nearly identical to BlackRock’s and Vanguard’s cost less. There was no good reason to pay more money for the same damn thing.

My Fee-Only Advisor

Despite the pride I felt in building my investment portfolio, I wanted an objective review of what I had done. My goal was to retire early on a certain income. Despite my years of self-tutelage, I’d never discovered the formula that could give me a straight answer. Could I retire when I wanted? Or was I looking at another 15 years of work?

So after 25+ years of investing on my own, I went to a fee-only financial planner to get the answers to my questions…. The news was good. It was better good – it was great! He told me that I was on track and that I could retire two years earlier than I’d planned. Woohoo!

For the first time in my investing life, I was getting good advice. The financial planner pointed out a few weaknesses in my investment strategy. He offered me a tentative, new plan and explained how it could improve my returns going forward. However, he also assured me that I had done a very good job by myself and that my goals would be met whether I followed his suggestions or not.

When it comes to getting good advice, I’m a fan of fee-only financial planners. They work for the customer, who is you. They make recommendations, but they don’t sell investment products. That means that they don’t get a commission from someone else for making certain recommendations or pushing the investment-product-of-the-month. You’ll pay a fee for them to analyze your current situation and to create a plan whereby you will meet your financial goals. They will give you advice and it’s up to you whether to follow it.

Have I made mistakes? Yes – many mistakes. I didn’t get great advice to start. The only rule that I’ve always followed was to live below my means. (Even when I was stupid in 2008/2009 and stopped investing when the market crashed, I just piled up money in my savings account until it was “safe” to start investing again.) I saved and invested and switched my investments and kept learning-learning-learning … then more than 25 years later, I finally went to a professional advisor.

Getting good advice is worth the effort. It allows you to reach your goals faster and more efficiently. Though I am self-taught, I have benefitted from many resources over the years. I’m confident that I have the knowledge to separate the good advice from the bad as I continue to fulfill my financial goals. You can do it too. Start today. Save – invest – learn – repeat. When you know better, you’ll do better. I promise.